Risk Management

This chapter examines the intricate landscape of corporate risk management, focusing on the decision to hedge financial risks. It explores the major theoretical frameworks developed over the past 40 years that justify corporate hedging, including agency theory, tax-based explanations, and stakeholder management. The text delves into the role of market imperfections, such as taxes, agency costs, financial distress, and information asymmetry, in driving hedging behavior. It also highlights the influence of managerial traits, such as overconfidence, narcissism, and risk aversion, on risk management strategies. The chapter discusses the impact of hedging on financial distress, underinvestment, idiosyncratic risk reduction, and taxes. It concludes by examining the influence of industry characteristics, country-level factors, and the effect of hedging on enterprise value. Professionals will gain insights into the complex decision-making process behind corporate risk management and the various factors that can influence hedging strategies.